Currencies’ Wild Ride to Get Wilder as U.S. Rate Rise Beckons

If you thought the past week in the foreign-exchange market was wild, you haven’t seen anything yet.

That’s the outlook from investors and strategists ranging from State Street Global Advisors to Cambridge Global Payments after price swings in the euro versus the dollar approached the highest level in more than three years.

Volatility surged as traders unwound bets for gains in European bonds and stocks that had been funded in euros, prompting demand for the shared currency to close out what are known as carry trades. Price swings accelerated Friday after a lackluster U.S. employment report, raising more questions than answers about the timing of Federal Reserve interest-rate increases.

“This unusual backdrop is going to create some turmoil,” said Dan Farley, the Boston-based chief investment officer for the investment solutions group of State Street, which manages $2.4 trillion. “The next several weeks are likely to be choppy as things continue to be absorbed, bouncing off the good and the bad news.”

The euro’s one-month implied volatility jumped as high as 13.2 percent, inching toward the 14 percent level where it last closed in December 2011. The common currency was unchanged on the week at $1.1199 as of 5 p.m. on Friday in New York.

The Bloomberg Dollar Spot Index slid 0.7 percent, falling a fourth week in its longest run of declines since October 2013. The greenback weakened 0.3 percent to 119.76 yen.

Debt Selloff

Europe’s bond rout wiped more than $400 billion from the value of the region’s debt in the past two weeks as investors questioned whether the European Central Bank will continue its program of asset purchases through September 2016 amid signs the region’s economy is picking up.

The selloff eroded the premium Treasuries pay over bunds to the narrowest since February, lessening the attractiveness of dollar-denominated assets.

“You’re going to see continued volatility driven by the bond markets,” said Karl Schamotta, director of foreign-exchange research and strategy at Cambridge Global Payments in Toronto. “Investors are increasingly concerned that they could be caught in the exits when everyone rushes out of the theater.”

The greenback fell against most of its major peers this week as a Labor Department report showed American employers accelerated job creation in April after monthly hires fell to the lowest since 2012 in March.

Dollar Decline

The Fed is scrutinizing such data as it considers raising rates for the first time since 2006. Policy makers noted that the pace of job gains in the U.S. had “moderated” in minutes from their last meeting on April 29.

“What we need to see is some consistently positive data out of the U.S.,” Lennon Sweeting, a Toronto-based dealer at the broker and payment provider USForex Inc., said by phone. “I don’t think the dollar is totally in the clear just yet.”

The dollar has fallen 3.5 percent in the past month, Bloomberg Correlation-Weighted Indexes show. The euro by contrast has added 0.7 percent.

Economic reports next week may provide a catalyst for the dollar to resume its rise, with the publication of the Fed’s index of labor market conditions and data on retail sales and industrial production.

“If you’re in the camp that believes that growth in the economy is back on track, the dollar should be back in its upward trend,” Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank in Santa Clara, California, said by phone.